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Court of Appeal overturns High Court’s decision to correct a drafting error in a restrictive covenant

In Prophet plc v Huggett [2014] EWCA Civ 1013, the Court of Appeal has overturned the High Court’s decision to correct the drafting of a restrictive covenant which, when read literally, offered no protection to the employer. The Court unanimously held that the judge’s approach was wrong, finding that the drafting of the restriction was “unambiguously clear” and that there was “no basis upon which the judge was entitled to re-cast the parties’ bargain in the way he did”.

Background

Restrictive covenants are one of the most litigated areas of employment law in the civil courts and the tests for establishing the construction and enforceability of a restrictive covenant are well established.

First, the court must consider what the covenant means when properly construed. The court has discretion to infer minimal amendments to the written wording, in order to give the clause the meaning that had been intended by the parties when the contract was signed. Secondly, the court will consider whether the employer has a legitimate business interest to protect. Thirdly, the court will consider whether the covenant is no wider than necessary to protect the legitimate business interest. If the restriction goes further than is necessary, it is likely to be ruled a restraint of trade and will be unenforceable.

Finally, the court will have to decide as a matter of discretion whether to grant an injunction to restrain the individual and will take into account factors such as the potential damage or loss to the employer if the injunction were not granted, the hardship that would be suffered by the individual if it were and whether there may be a more appropriate remedy, such as damages.

Facts

Mr Huggett was employed as a sales manager by Prophet Plc (Prophet), a company that developed and sold computer software for use in the fresh produce industry. Mr Huggett's contract of employment contained a number of restrictive covenants, including a one year non-compete restriction.

In December 2013, Mr Huggett resigned from his role at Prophet to take up a sales role at K3 Business Solutions Limited (K3), a competitor of Prophet. Prophet asserted that Mr Huggett would be in breach of his non-compete restriction if he went to work for K3 and, following correspondence with solicitors acting for Mr Huggett, sought an injunction in the High Court preventing Mr Huggett from taking up his role with K3 (or any other employer covered by the restriction) for the duration of the restriction.

Mr Huggett argued that the restriction did not prevent him from working for K3. This was on the basis that there was a general caveat at the end of the non-compete restriction, which stated: "…this restriction shall only operate to prevent the Employee from being [employed] in any area or in connection with any products in, or on, which he/she was involved whilst employed hereunder." On the face of it, this meant that the only companies Mr Huggett was restricted from working for were ones that were connected with the products he was involved with while employed by Prophet. As the software that Prophet developed was not sold by any other company, the restriction - taken on its literal meaning - was worthless and did not restrict Mr Huggett from working for K3 or any other company.

High Court decision

The High Court ruled that the restriction, when properly construed, prevented Mr Huggett from taking up employment with K3 for the period of the restriction and granted the injunction sought by Prophet. The judge found that “something had gone wrong” in the drafting of the clause and considered what the parties must have intended the restriction to say at the time it was agreed and what a reasonable person would have understood the parties to have intended.

The judge concluded that the restriction was intended to cover any company involved with products developed by Prophet "or similar thereto" and therefore added this wording to the end of the restriction to achieve this effect.

The judge was satisfied that the amended restriction protected a legitimate interest of Prophet and that it was suitably narrow so as not to constitute a restraint of trade. In considering whether to grant the injunction, the judge considered that there would not be significant hardship to Mr Huggett and that an injunction was the appropriate remedy in the circumstances. Mr Huggett appealed the High Court’s decision, arguing that the judge had “gone astray” in his interpretation of the clause and had wrongly written additional words into it, which neither party had suggested, to give it “a wider effect than its apparent ordinary meaning”.

Court of Appeal decision

In considering the offending clause, the Court of Appeal agreed that the meaning of the words “any products” in the offending clause could only refer to the products with which Mr Huggett was involved while he was employed at Prophet and that the clause therefore imposed “no material restraint upon Mr Huggett”, on a literal interpretation.

However, rather than finding that something had “gone wrong” with the drafting, such that it was appropriate for the court to “re- make” the clause, as the High Court had done, the Court found that this was a “carefully drawn piece of legal prose in which the draftsman chose his words with deliberate and specific care”. What had gone wrong with the drafting was that the draftsman “did not think through to

what extent his chosen restriction would be likely to achieve any practical benefit to Prophet upon Mr Huggett’s departure to a competitor”. However, there was “no basis upon which the judge was entitled to re-cast the parties’ bargain in the way he did”.

The Court acknowledged that the courts would normally interpret an ambiguous contractual provision such as to reach a commercially sensible solution but it did not find that Prophet’s clause could be interpreted in any other way. In allowing the claimant’s appeal, the Court commented that “Prophet made its … bed and it must now lie upon it’.

Comment

The decision of the High Court to cure the faulty clause with the addition of wording was an unusual one and it is not surprising that the Court of Appeal chose to disagree with its approach. Although the courts have wide powers of interpretation when dealing with restrictive covenants, such powers do not usually go as far as adding wording to a restriction.

As was acknowledged in this case, the court will look to achieve a commercially sensible solution when faced with an ambiguous provision in a restrictive covenant and this may extend on occasion to deleting wording or amending grammar.

This decision serves as a stark reminder to check carefully the drafting of any covenants contained in employment contracts to ensure they provide the protection intended and are likely to be enforceable. As is apparent in this case, even apparently careful drafting may not have the desired effect and an employer cannot rely on the court to rewrite the wording.

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